As house prices in the UK soar to record levels, lenders are now starting to offer mortgages to borrowers offering a deposit of just five per cent under a new Government guarantee scheme.
The policy, announced in the March Budget, is designed to help more first-time buyers secure a home.
The scheme is similar to policies previously used to boost the housing market and the economy, as well as offering support to those buying a home for the first time.
The new scheme will be available to anyone buying a home costing up to £600,000, unless they are buy-to-let or second homes.
The Government is offering a partial guarantee, generally of 15 per cent, to compensate lenders if the borrower defaults on repayments.
The guarantee is designed to give lenders the confidence to offer 95 per cent loan-to-value mortgages – many of which were withdrawn during the COVID crisis.
Lloyds, Santander, Barclays, HSBC and NatWest have started to offer products already and Virgin Money is expected to follow soon.
However, some lenders such as Halifax, which is part of Lloyds Banking Group, and Barclays have said that these products will not be available for new-build properties.
Chancellor Rishi Sunak said: “By giving lenders the option of a Government guarantee on 95 per cent mortgages, many more products will become available, boosting the sector, creating new jobs and helping people achieve their dream of owning their own home.”
Despite the new guarantee, lenders will still need to carry out affordability checks. Anyone who has lost a job, or whose income has been sporadic owing to the pandemic’s effect on employment may find it difficult to secure a mortgage.
House prices have been rising – partly because of Government stimulus, and there are concerns too about the potential for some to fall into negative equity if this is followed by sharp falls in property values.
Some of the new mortgage rates are close to four per cent for a two-year fixed-rate deal. For example, rates on NatWest’s new 95 per cent mortgages will start at 3.9 per cent.
However, analysts also suggest that cheaper deals are available for those able to stretch to a 10 per cent deposit.
Lloyd Cochran, Head of Mortgages at NatWest, said: “It reflects the extra risk the bank is taking on. I think over the long term that is a pretty competitive rate for customers.
“One of the things we do is ensure that the customer can afford that rate. We also ensure… the customer can afford that loan if interest rates were to rise.”
Michelle Andrews, HSBC UK’s Head of Buying A Home said: “We have supported home buyers and the wider housing market throughout the pandemic and are excited to support the Mortgage Guarantee Scheme.
“After such a turbulent year it is great that this scheme will make a real difference in enabling first time buyers who didn’t think they would have a chance of getting a mortgage and home movers to get the keys to their new home.”